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Sunday, June 30, 2013

Immigration, Class, & Ideology

I'm still catching up and recovering from recent events, so I'll turn the microphone over to Chris Dillow:

Immigration, Class, & Ideology: ...the effects of immigration take place in a class-divided society. For those in power, the benefits - high profits - are quick and easy. But for those at the bottom end of the labour market, they are less pleasant.

But it needn't be so. Imagine our retailer were a full-blooded worker coop. Workers would then think: "Isn't it great we don't have to that dangerous job now, so we can do nicer jobs and get a share of higher profits". And if redundancies are made, they'll be on better terms. (And of course, in a society not disfigured by class division, unemployment benefits would be higher).

In this sense, it is obvious that immigration - insofar as it does worsen the condition of some workers (which is easily overstated) - is a class issue. Rather than ask: "why are immigrants taking my job?" Dave could equally ask: "why are there class divisions which prevent the benefits of migration flowing to everyone?"

So, why is one question asked when the other isn't? The answer is that capitalist power doesn't just determine who gets what, but also what issues get raised and which don't. As E.E.Schattschneider wrote in 1960:

Some issues are organized into politics while others are organized out. (quoted in Lukes, Power: A Radical View, p20)

In this way, it is immigrants who get scapegoated rather than capitalists.

    Posted by on Sunday, June 30, 2013 at 09:36 AM in Economics, Immigration, Politics | Permalink  Comments (42) 

    Links for 06-30-2013

      Posted by on Sunday, June 30, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (53) 

      Saturday, June 29, 2013

      'The Body Economic: Why Austerity Kills'

      I am hosting a Firedoglake Book Salon later today:

      Introductory post and discussion (at 2:00 PST/5:00 EST today)

      The book is The Body Economic: Why Austerity Kills by David Stuckler and Sanjay Basu.

        Posted by on Saturday, June 29, 2013 at 01:19 PM in Economics, Fiscal Policy, Health Care | Permalink  Comments (7) 

        'DSGE Models and Their Use in Monetary Policy'

        Mike Dotsey at the Philadelphia Fed:

        DSGE Models and Their Use in Monetary Policy: The past 10 years or so have witnessed the development of a new class of models that are proving useful for monetary policy: dynamic stochastic general equilibrium (DSGE) models. The pioneering central bank, in terms of using these models in the formulation of monetary policy, is the Sveriges Riksbank, the central bank of Sweden. Following in the Riksbank’s footsteps, a number of other central banks have incorporated DSGE models into the monetary policy process, among them the European Central Bank, the Norge Bank (Norwegian central bank), and the Federal Reserve.
        This article will discuss the major features of DSGE models and why these models are useful to monetary policymakers. It will indicate the general way in which they are used in conjunction with other tools commonly employed by monetary policymakers. ...

          Posted by on Saturday, June 29, 2013 at 12:24 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (11) 

          Links for 06-29-2013

            Posted by on Saturday, June 29, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (62) 

            Friday, June 28, 2013

            'What to Do with the Hypertrophied Financial Sector?'

            Brad DeLong:

            ... Over the past year and a half, in the wake of Thomas Philippon and Ariel Resheff's estimate that 2% of U.S. GDP was wasted in the pointless hypertrophy of the financial sector, evidence that our modern financial system is less a device for efficiently sharing risk and more a device for separating rich people from their money--a Las Vegas without the glitz--has mounted. Bruce Bartlett points to Greenwood and Scharfstein, to Cechetti and Kharoubi's suggestion that financial deepening is only useful in early stages of economic development, to Orhangazi's evidence on a negative correlation between financial deepening and real investment, and to Lord Adair Turner's doubts that the flowering of sophisticated finance over the past generation has aided either growth or stability.
            Four years ago I was largely frozen with respect to financial sophistication. It seemed to me then that 2008-9 had demonstrated that our modern sophisticated financial systems had created enormous macroeconomic risks, but it also seemed to me then that in a world short of risk-bearing capacity with an outsized equity premium virtually anything that induced people to commit their money to long-term risky investments by creating either the reality or the illusion that finance could, in John Maynard Keynes's words, "defeat the dark forces of time and ignorance which envelop our future". ...
            But the events and economic research of the past years have demonstrated ... I should ... have read a little further in Keynes, to "when the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done". And it is time for creative and original thinking--to construct other channels and canals by which funding can reach business and bypass modern finance with its large negative alpha.

              Posted by on Friday, June 28, 2013 at 10:32 AM in Economics, Financial System, Regulation | Permalink  Comments (120) 

              Paul Krugman: Invest, Divest and Prosper

              The war on coal won't cost jobs in a depressed economy, it "could be just what our economy needs":

              Invest, Divest and Prosper, by Paul Krugman, Commentary, NY Times: It has been a busy news week, what with voting rights, gay marriage and Paula Deen. Even so, it’s remarkable how little attention the news media gave to President Obama’s new “climate action plan.”...; this is ... a very big deal. For this time around, Mr. Obama wasn’t touting legislation we know won’t pass. The new plan is, instead, designed to rely on executive action. This means that ... it can bypass the anti-environmentalists who control the House of Representatives.
              Republicans realize this, and ... right now they don’t seem eager to attack climate science, maybe because that would make them sound unreasonable (which they are). Instead, they’re ... denouncing the Obama administration for waging a “war on coal” that will destroy jobs.
              And you know what? They’re half-right. The new Obama plan is, to some extent, a war on coal — because reducing our use of coal is, necessarily, going to be part of any serious effort to reduce greenhouse gas emissions. But making war on coal won’t destroy jobs. In fact, serious new regulation of greenhouse emissions ...
              It’s always important to remember that what ails the U.S. economy right now isn’t lack of productive capacity, but lack of demand. The housing bust, the overhang of household debt and ill-timed cuts in public spending have created a situation in which nobody wants to spend; and because your spending ... this leads to a depressed economy over all. ...
              Suppose that electric utilities, in order to meet the new rules, decide to close some existing power plants and invest in new, lower-emission capacity. Well, that’s an increase in spending, and more spending is exactly what our economy needs.
              O.K., it’s still not clear whether any of this will happen. Some of the people I talk to are cynical..., believing that the president won’t actually follow through. All I can say is, I hope they’re wrong.
              Near the end of his speech, the president urged his audience to: “Invest. Divest. Remind folks there’s no contradiction between a sound environment and strong economic growth.” Normally, one would be tempted to dismiss this as the sound of someone waving away the need for hard choices. But, in this case, it was simple good sense: We really can invest in new energy sources, divest from old sources, and actually make the economy stronger. So let’s do it.

                Posted by on Friday, June 28, 2013 at 12:24 AM in Economics, Environment | Permalink  Comments (72) 

                Links for 06-28-2013

                  Posted by on Friday, June 28, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (51) 

                  Thursday, June 27, 2013

                  The Long-Term Budget Picture

                    Posted by on Thursday, June 27, 2013 at 09:07 AM in Budget Deficit, Economics | Permalink  Comments (25) 

                    Inflation is Too Low

                    Inflation is too low (and unemployment is too high):

                    Yes, We Have No Inflation, by Binyamin Appelbaum, NY Times: Inflation remained sluggish in May. Prices continued to rise at the slowest pace in at least half a century, up just 1.1 percent over the previous year, the Bureau of Economic Analysis said Thursday. ...

                    As he goes on to explain:

                    Slow inflation may sound like a good thing, but it’s not. Particularly not now.


                    Ben S. Bernanke ... and other Fed officials have shown relatively few signs of concern lately. The Fed’s most recent policy statement, and its economic projections, both released last week, show that Fed officials expect the pace of inflation to increase gradually. ...
                    “There are a number of transitory factors that may be contributing to the very low inflation rate,” Mr. Bernanke said last week. “For example, the effects of the sequester on medical payments, the fact that nonmarket prices are extraordinarily low right now. So these are some things that we expect to reverse and we expect to see inflation come up a bit. If that doesn’t happen, we will obviously have to take some measures to address that. And we are certainly determined to keep inflation not only — we want to keep inflation near its objective, not only avoiding inflation that’s too high, but we also want to avoid inflation that’s too low.”

                    If they "want to avoid inflation that’s too low," they should be doing more about it now instead of coming up with reasons, yet again, to wait and see. Why not say, for example, we'll do more now, and if it turns out we overshoot our target a bit due to medical prices going up, "we will obviously have to take some measures to address that."

                      Posted by on Thursday, June 27, 2013 at 07:38 AM in Economics, Inflation, Monetary Policy | Permalink  Comments (42) 

                      Links for 06-27-2013

                        Posted by on Thursday, June 27, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (88) 

                        Wednesday, June 26, 2013

                        'Karicature Keynesianism'

                        Paul Krugman is tired of the Karicatures:

                        Karicature Keynesianism: Via Brad DeLong, Daniel Kuehn protests a really stupid argument by Stephen Landsburg; he does the work, and no need for me to follow up.
                        But let me note that Landsburg’s latest unfortunate intervention follows a well-trodden path: that of starting from the proposition that Keynesians are themselves really, really stupid — a proposition argued not by pointing to anything actual Keynesians say, but instead by presenting a caricature that supposedly is what Keynesians believe. Call it Karicature Keynesianism.
                        Anyone who’s followed the various attacks on yours truly knows what I mean: Keynesians believe that budget deficits never matter, that increasing demand can solve all economic problems, that there’s no such thing as a supply side to the economy, that more spending is always good. You can see it even in the comments to Kuehn’s post, with people expressing doubt about whether there’s crowding out in my textbook. Let me suggest a very difficult research project: how about actually looking at the book?
                        Now, to some extent Karicature Keynesianism involves extrapolating what people like me say about policy in a depressed economy with interest rates up against the zero lower bound and pretending that this is what we say in all situations. But where’s this urge to caricature coming from?
                        I’d say that it’s actually a form a flattery. If Keynesians had made a lot of bad predictions in recent years — if inflation or interest rates had soared, if austerity had produced prosperity — the other side could go after what we actually said and say. But reality, it turns out, has a well-known Keynesian bias. So the people who’ve gotten everything wrong are reduced to attacking an economic doctrine that has worked pretty well by misrepresenting that doctrine, and claiming that it’s stupid and absurd. ...

                        Let me follow-up on the point about predictions. A relatively well known economist who recently started a blog said he has a formula for getting things right -- just take the opposite side of Krugman on any issue ("to take the correct stand on any issue I need only learn Krugman's, and take the opposite"). What's remarkable about his statement is that Krugman got it basically right. Not in every instance or every detail, but far, far more than most.

                        So what we have is someone who is supposed to be a credible voice implicitly telling readers to believe those who were wrong over those who were right (or at least be dismissive of someone who is telling them things they need to know). Why? Because his team disses Krugman. That's what they do. He was probably trying to impress the people in this group, get a little chuckle for his witty (?) remark by playing the bash Krugman game. He and others are supposed to be these data based, scientist types -- that's how they portray themselves -- but the truth is that many of them are anything but. It's a sad reflection of our profession.

                          Posted by on Wednesday, June 26, 2013 at 09:17 AM in Economics, Politics | Permalink  Comments (124) 

                          Central Banks: Powerful or Powerless?

                          Antonio Fatas:

                          ... I find it surprising that those who argued that QE had very little effect in the economy are now ready to blame the central bank for all the damage they will do to the economy when they undo those measures. So they seem to have a model of the effectiveness of central banks that is very asymmetric - I would like to see that model. ...

                          Much more here.

                            Posted by on Wednesday, June 26, 2013 at 08:52 AM in Economics, Monetary Policy | Permalink  Comments (21) 

                            How Will the Fed Respond to the Downward Revision to Q1 GDP?

                            When will the Fed make it's move? The revision to first quarter GDP growth from 2.4% to 1.8% announced today suggests it will be later rather than sooner:

                            Q1 GDP Revised down to 1.8% Annualized Real Growth Rate, by Bill McBride: GDP was revised down from a 2.4% annualized real growth rate to 1.8% in Q1. From the BEA:

                            Real gross domestic product ... increased at an annual rate of 1.8 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "third" estimate released by the Bureau of Economic Analysis. ... The downward revision to the percent change in real GDP primarily reflected downward revisions to personal consumption expenditures, to exports, and to nonresidential fixed investment that were partly offset by a downward revision to imports.

                            Personal consumption expenditure growth was revised down from a 3.4% annualized rate in the 2nd estimate to 2.6% in the 3rd estimate of GDP. ...

                            The current FOMC forecast is for GDP to increase between 2.3% and 2.6% from Q4 2012 to Q4 2013. The first quarter was below the FOMC projections..., and it appears the second quarter will also be below the FOMC forecast - if so, then GDP will have to pickup in the 2nd half of 2013 for the Fed to start tapering QE3 purchases in December.

                            The Fed does not seem to be able to learn its lesson about being overly optimistic (e.g., me in 2009 on the Fed, Green Shoots, Real or Imagined?).

                              Posted by on Wednesday, June 26, 2013 at 08:45 AM in Economics, Monetary Policy | Permalink  Comments (16) 

                              The Moral of Animal Farm

                              George Orwell (in 1946) on the moral of Animal Farm:

                              ... I meant the moral to be that revolutions only effect a radical improvement when the masses are alert and know how to chuck out their leaders as soon as the latter have done their job. ... If people think I am defending the status quo, that is, I think, because they have grown pessimistic and assume that there is no alternative except dictatorship or laissez-faire capitalism. ... What I was trying to say was, “You can’t have a revolution unless you make it for yourself...

                                Posted by on Wednesday, June 26, 2013 at 08:32 AM in Economics, Politics | Permalink  Comments (20) 

                                Links for 06-26-2013

                                  Posted by on Wednesday, June 26, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (128) 

                                  Tuesday, June 25, 2013

                                  New Research in Economics: The IMF and Global Financial Crises; Phoenix Rising?

                                  This is from Joseph P. Joyce, the author of The IMF and Global Financial Crises; Phoenix Rising?, which was published last year by Cambridge University Press. The book examines the evolution of the policies and programs of the IMF with respect to the global financial markets and crises in these markets:

                                  Among the many surprising features of the global financial crisis of 2008-09 was the emergence of the International Monetary Fund (IMF) as a leading player in the response to what has become known as the “Great Recession.” The news that the IMF was “back in business” was remarkable in view of the deterioration of the IMF’s reputation after the crises of the late 1990s and the decline in its lending activities in the succeeding decade. The IMF had been widely blamed for indirectly contributing to the earlier crises by advocating the premature removal of controls on capital flows, and then imposing harsh and inappropriate measures on the countries that were forced by capital outflows to borrow from it. Moreover, the IMF initially had no direct role in dealing with the crisis. The IMF was relegated to the sidelines as government officials in the advanced economies coordinated their responses to the crisis.
                                  All this changed in the fall of 2008, however, when the collapse of the financial system led to an economic contraction that spread outside the original group of crisis countries. World trade fell and capital flows slowed and in some cases reversed, as nervous banks, firms and investors sought to reallocate their money to safer venues. In response, the IMF provided loans to a range of countries, including the Ukraine, Hungary, Iceland, and Pakistan. In addition, the IMF restructured its lending programs, cutting back on the policy conditions attached to its loans and increasing the amount of credit a country could obtain. The Fund also introduced a new credit line without conditions for countries with records of stable policies and strong macroeconomic performance. Moreover, the IMF pledged to work with national governments and other international organizations after the crisis receded to continue the economic recovery and improve the regulation of global financial markets. Consequently, many commentators hailed the rejuvenated IMF as a “phoenix”.
                                  The IMF’s response to the Great Recession marked a significant break from its policies during previous global financial crises. These had taken place during an era when the IMF’s membership was stratified by income and whether or not a country borrowed from the Fund. In addition, the IMF had actively encouraged the deepening and widening of global finance. The IMF’s previous responses to financial crises, therefore, reflected the dominance of its upper-income members as well as an ideological consensus in favor of financial flows.
                                  The crisis hastened the end of those conditions. The shock to global financial markets and economies originated in the upper-income countries, and the recovery of many of these nations has been relatively sluggish. The emerging economies, on the other hand, rebounded from the global economic contraction more quickly, which in turn contributed to the recovery of the developing nations. Moreover, the crisis demonstrated that financial instability can be a systemic condition, confirming the need for prudent oversight and the regulation of financial markets and capital flows.       
                                   But while the Great Recession provided the IMF with an opportunity to demonstrate that it has learned the lessons of its past mistakes, there are fundamental economic and political transformations underway which will affect the ability of the IMF to counter future financial instability. The replacement of the dominance of the G7/8 by the G20 should lead to a more equitable governance structure within the IMF, but inertia has slowed the pace of reform. Moreover, the European debt crises pose new challenges to the IMF. The Fund is caught in the crossfire among Eurozone governments and their citizenries over how to deal with insolvent sovereign members. New fiscal challenges will arise in other advanced economies with aging populations and mounting health care and public pension costs, and the IMF’s response will be scrutinized by its emerging market members who are concerned about the scale of its lending.

                                    Posted by on Tuesday, June 25, 2013 at 06:03 AM in Economics | Permalink  Comments (10) 

                                    'Highway Robbery for High-Speed Internet'

                                    Why is internet service so expensive?:

                                    Highway Robbery for High-Speed Internet, by Paul Waldman, American Prospect: If you're one of those Northeastern elitists who reads The New York Times, you turned to the last page of the front section Friday and saw an op-ed from a Verizon executive making the case that "the United States has gained a global leadership position in the marketplace for broadband"... "Hey," you might have said. "Didn't I read an almost identical op-ed in the Times just five days ago?" Indeed you did, though that one came not from a telecom executive but from a researcher at a telecom-funded think-tank. And if you live in Philadelphia, your paper recently featured this piece from a top executive at Comcast, explaining how, yes, American broadband is the bee's knees.
                                    That smells an awful lot like a concerted campaign to convince Americans not to demand better from their broadband providers. ... The telecoms are right about one thing: In the last few years, broadband speeds have improved. ... But we're paying for what we get—oh boy, are we ever paying. ...
                                    How did it come to this? ... Susan Crawford, a Harvard professor and author of Captive Audience: The Telecom Industry and Monopoly Power In the New Gilded Age, puts the blame on the situation that the cable and telecom companies have so purposefully engineered. "As things stand," she has written, "the U.S. has the worst of both worlds: no competition and no regulation." ... In many places, the local cable monopoly is the only realistic choice you have for internet service...
                                    With growing demand for video, online games, and other bandwidth-sucking uses, ISPs have no choice but to keep increasing the speed of their service. But they're in a position to make sure that we keep paying through the nose for it. In other countries, costs have been kept down in large part because they treat broadband like a utility. We have special rules for things like water and electricity, both because they are absolutely vital to modern existence and because of the impracticality of having too many competing providers in any one geographical area. But in exchange for their monopoly position, companies like Pepco or Con Edison are subject to tight regulation to make sure they don't gouge their customers. Today's cable companies, on the other hand, enjoy all the benefits of their monopolies (or in some places, duopolies), with little of the regulatory oversight. As long as that's true, broadband won't get any cheaper.

                                      Posted by on Tuesday, June 25, 2013 at 05:53 AM in Economics, Market Failure | Permalink  Comments (26) 

                                      Links for 06-25-2013

                                        Posted by on Tuesday, June 25, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (130) 

                                        Monday, June 24, 2013

                                        'The Intellectual Bankruptcy of the Austerians'

                                        Some comments on the latest report from the BIS:

                                        Paul Krugman: Dead-enders in Dark Suits: ... Part of what makes the report so awesome is the way that it trots out every discredited argument for austerity, with not a hint of acknowledgement that these arguments have been researched and refuted at length ...
                                        Antonio Fatas: BIS: Bank for Inconsistent Studies: ... Yet another day when one feels that this crisis has been a wasted crisis for economists to learn about our mistakes. ...
                                        Simon Wren-Lewis: The intellectual bankruptcy of the austerians: ... It is both amusing and tragic to watch the advocates of fiscal austerity try and deal with the fact that the thin intellectual foundations for their approach have crumbled away, while at the same time the empirical evidence of their folly accumulates ...

                                          Posted by on Monday, June 24, 2013 at 09:33 AM in Economics | Permalink  Comments (60) 

                                          Paul Krugman: Et Tu, Bernanke?

                                          Why is the Fed talking about returning to normal monetary policy even though unemployment is still a huge problem?:

                                          Et Tu, Bernanke?, by Paul Krugman, Commentary, NY Times: For the most part, Ben Bernanke and his colleagues at the Federal Reserve have been good guys in these troubled economic times. They have tried to boost the economy even as most of Washington seemingly either forgot about the jobless... You can argue — and I would — that the Fed’s activism, while welcome, isn’t enough, and that it should be doing even more. But at least it didn’t lose sight of what’s really important.
                                          Until now.
                                          Lately, Fed officials have been issuing increasingly strong hints that ... they are eager to start “tapering,” returning to normal monetary policy. ...
                                          The trouble is that this is very much the wrong signal to be sending given the state of the economy. We’re still very much living through what amounts to a low-grade depression — and the Fed’s bad messaging reduces the chances that we’re going to exit that depression any time soon. ...
                                          Sure enough, rates have shot up since the tapering talk started..., and ... higher rates will surely mean a slower recovery...
                                          Fed officials surely understand all of this. So what do they think they’re doing?
                                          One answer might be that the Fed has quietly come to agree with critics who argue that its easy-money policies are having damaging side-effects, say by increasing the risk of bubbles. But I hope that’s not true, since whatever damage low rates may do is trivial compared with the damage higher rates, and the resulting rise in unemployment, would inflict.
                                          In any case, my guess is that what’s really happening is a bit different: Fed officials are, consciously or not, responding to political pressure. After all, ever since the Fed began its policy of aggressive monetary stimulus, it has faced angry accusations from the right that it is “debasing” the dollar and setting the stage for high inflation... It’s hard to avoid the suspicion that Fed officials, worn down by the constant attacks, have been looking for a reason to slacken their efforts, and have seized on slightly better economic news as an excuse. ...
                                          It’s sad and depressing, in both senses of the word. The fundamental reason our economy is still depressed after all these years is that so many policy makers lost the thread, forgetting that job creation was their most urgent task. Until now the Fed was an exception; but now it seems to be joining the club. Et tu, Ben?

                                            Posted by on Monday, June 24, 2013 at 12:24 AM in Economics, Monetary Policy | Permalink  Comments (42) 

                                            Links for 06-24-2013

                                              Posted by on Monday, June 24, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (53) 

                                              Sunday, June 23, 2013

                                              'A Few Comments on Dumb Policy'

                                              Calculated Risk:

                                              A few comments on dumb policy: Please excuse my frustration ... there are frequently honest disagreements on policy, but occasionally there are policies that are almost universally panned. An example of a recent dumb policy ...[and more] ...

                                                Posted by on Sunday, June 23, 2013 at 03:59 PM in Economics | Permalink  Comments (34) 

                                                Links for 06-23-2013

                                                  Posted by on Sunday, June 23, 2013 at 12:03 AM Permalink  Comments (117) 

                                                  Saturday, June 22, 2013

                                                  'Debased Economics'

                                                  I need a quick post today, so I'll turn to the most natural blogger I can think of, Paul Krugman:

                                                  Debased Economics: John Boehner’s remarks on recent financial events have attracted a lot of unfavorable comment, and they should. ... I mean, he’s the Speaker of the House at a time when economic issues are paramount; shouldn’t he have basic familiarity with simple economic terms?
                                                  But the main thing is that he’s clinging to a story about monetary policy that has been refuted by experience about as thoroughly as any economic doctrine of the past century. Ever since the Fed began trying to respond to the financial crisis, we’ve had dire warnings about looming inflationary disaster. When the GOP took the House, it promptly called Bernanke in to lecture him about debasing the dollar. Yet inflation has stayed low, and the dollar has remained strong — just as Keynesians said would happen.
                                                  Yet there hasn’t been a hint of rethinking from leading Republicans; as far as anyone can tell, they still get their monetary ideas from Atlas Shrugged.
                                                  Oh, and this is another reminder to the “market monetarists”, who think that they can be good conservatives while advocating aggressive monetary expansion to fight a depressed economy: sorry, but you have no political home. In fact, not only aren’t you making any headway with the politicians, even mainstream conservative economists like Taylor and Feldstein are finding ways to advocate tighter money despite low inflation and high unemployment. And if reality hasn’t dented this dingbat orthodoxy yet, it never will.

                                                  I'll be offline the rest of today ...

                                                    Posted by on Saturday, June 22, 2013 at 09:31 AM in Economics, Inflation, Macroeconomics, Monetary Policy | Permalink  Comments (59) 

                                                    Links for 06-22-2013

                                                      Posted by on Saturday, June 22, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (58) 

                                                      Friday, June 21, 2013

                                                      Fed Watch: Hilsenstory

                                                      Tim Duy:

                                                      Hilsenstory, by Tim Duy: Jon Hilsenrath analyzes the week's events and concludes:

                                                      The markets might be misreading the Federal Reserve’s messages.


                                                      “The FOMC was more hawkish than we had expected,” economists at Goldman Sachs concluded after the Wednesday Fed policy meeting, a view widely held on Wall Street trading floors.

                                                      However, a close look at Mr. Bernanke’s press conference comments and Fed official’s interest-rate projections released after the meeting show the Fed took several steps aimed at sending the opposite signal.

                                                      I am going to add two points. First is that while great pains were taken to lock up expectations of the path of short-run interest rates, the Fed may be underestimating the importance of the flow of asset purchases. Federal Reserve Chairman Ben Bernanke reiterated the Fed's belief that the stock of asset held is the key variable. Felix Salmon, however, has the oppostie view:

                                                      At his press conference yesterday, Ben Bernanke reiterated his view that the way QE works is through simple supply and demand: since the Fed is buying up fixed-income assets, that means fewer such assets to go round for everybody else, and therefore higher prices on those assets and lower yields generally. In reality, however, the flow always mattered more than the stock: when the Fed is in the market every day, buying up assets, that supports prices more than the fact that they’re sitting on a large balance sheet. And even more important is the bigger message sent by those purchases: that we’re in a world of highly heterodox monetary policy, where the world’s central banks can help send asset prices, especially in the fixed-income world, to levels they would never be able to reach unaided.

                                                      I tend to think that market participants generally favor this view. And why shouldn't they? The pace of the flow says something about the expected future stock of the assets. One way to interpret this week's events is that market participants now see that the stock of assets held by the Fed is reaching its peak, and while the Fed may not sell those assets, they will let them mature off the balance sheet.

                                                      The second point, which I don't think should be under-emphasized, is that only one person who was in the room Tuesday and Wednesday has spoken about the meeting - St. Louis Federal Reserve President James Bullard. And I think he gave a pretty clear message:

                                                      Policy actions should be undertaken to meet policy objectives, not calendar objectives.

                                                      The Fed shifted toward calendar objectives this week. It is the only way to reconcile Bernanke's plan for ending QE with the data flow.

                                                      More directly to the point, however, is Bullard's response in this interview with Neil Irwin and Ylan Mui:

                                                      N.I.: Is that correct? Is this a more hawkish Fed today than it was a week ago or a month ago?

                                                      J.B.: Based on Wednesday’s action, I would say it is.

                                                      Bullard was in the room and concluded the same thing markets concluded: The Fed shifted in a hawkish direction this week. Bernanke might have tried to cushion the blow, but you can't avoid the reality that he he laid out a plan to end QE - and that plan involves a shift toward a calendar component.

                                                        Posted by on Friday, June 21, 2013 at 12:17 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (16) 

                                                        Fed Watch: It's About The Calendar

                                                        Tim Duy:

                                                        It's About The Calendar, by Tim Duy: St. Louis Federal Reserve President James Bullard explained his FOMC dissent in a press release this morning, and it was an eye-opener. I don't see how you can read Bullard's statement and not conclude that the primary consideration for scaling back asset purchases is the calendar. I think that the date, not the data, is more important than Fed officials like to claim.

                                                        Bullard first attacks the Fed's decision in light of falling inflation:

                                                        Federal Reserve Bank of St. Louis President James Bullard dissented with the Federal Open Market Committee decision announced on June 19, 2013. In his view, the Committee should have more strongly signaled its willingness to defend its inflation target of 2 percent in light of recent low inflation readings. Inflation in the U.S. has surprised on the downside during 2013. Measured as the percent change from one year earlier, the personal consumption expenditures (PCE) headline inflation rate is running below 1 percent, and the PCE core inflation rate is close to 1 percent. President Bullard believes that to maintain credibility, the Committee must defend its inflation target when inflation is below target as well as when it is above target.

                                                        No surprise here; Bullard frequently voices concerns about the path of inflation and inflation expectations on both sides of the target. The real action begins with the next sentence:

                                                        President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed. The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store. President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.

                                                        Bullard's point is a good one. Why would the Fed lay out a plan to withdraw accommodation - which in and of itself is a withdrawal of accommodation - at a meeting when forecasts were downgraded? Because, as a group, policymakers are no longer comfortable with asset purchases and want to draw the program to a close as soon as possible. And that means downplaying soft data and hanging policy on whatever good data comes in the door. In this case, that means the improvement in the unemployment rate forecast. Just for good measure, let's add on a new policy trigger, a 7% unemployment rate. In my opinion, it is not a coincidence that they picked a trigger variable where their forecasts have been most accurate or even too pessimistic. They loaded the dice in their favor.

                                                        Bullard then goes one step further:

                                                        In addition, President Bullard felt that the Committee’s decision to authorize the Chairman to make an announcement of an approximate timeline for reducing the pace of asset purchases to zero was a step away from state-contingent monetary policy. President Bullard feels strongly that state-contingent monetary policy is best central bank practice, with clear support both from academic theory and from central bank experience over the last several decades. Policy actions should be undertaken to meet policy objectives, not calendar objectives.

                                                        Key words: "calendar objectives." Bullard clearly felt the mood in the room was something to the effect of "We know the data is soft, but we want out of this program by the middle of next year, so we are going to lay out a program to do just that."

                                                        In light of Bullard's dissent, the market's reaction should be perfectly clear. I have seen some twitter chatter to the effect of market participants didn't understand what Federal Reserve Chairman Ben Bernanke was saying, that his message was really dovish, that interest rates would be nailed to the zero bound in 2015, that the policy was data dependent, etc. Market participants obviously didn't have that interpretation.

                                                        Indeed, I think market participants clearly heard Bernanke. After weeks of being soothed by analysts saying that the data was key, that low inflation would stay the Fed's hand, Bernanke laid out clear as day a plan for ending quantitative easing by the middle of next year. Market participants then concluded exactly what Bullard concluded: It's the date, not the data.

                                                        With that information in hand, market participants did exactly what they should have been expected. I think Felix Salmon has it right:

                                                        What we really saw today was not a move out of stocks, or bonds, or gold, but rather a repricing within each asset class.

                                                        The Fed changed the game this week. Bernanke made clear the Fed wants out of quantitative easing. While everything is data dependent, the weight has shifted. The objective of ending quantitative now carries as much if not more weight than the data. Market participants need to adjust the prices of risk assets accordingly.

                                                        Bottom Line: I think the question is not how good the data needs to be to convince the Fed to taper. The question is how bad it needs to be to convince them not to taper. And I think it needs to be pretty bad.

                                                          Posted by on Friday, June 21, 2013 at 09:12 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (14) 

                                                          Paul Krugman: Profits Without Production

                                                          The growing importance of monopoly rents:

                                                          Profits Without Production, by Paul Krugman, Commentary, NY Times: One lesson from recent economic troubles has been the usefulness of history. ... Yet economies do change over time, and sometimes in fundamental ways. So what’s really different about America in the 21st century?
                                                          The most significant answer, I’d suggest, is the growing importance of monopoly rents: profits that ... reflect the value of market dominance. ...
                                                          To see what I’m talking about, consider the differences between ... General Motors in the 1950s and 1960s, and Apple today.
                                                          Obviously, G.M. in its heyday had a lot of market power. Nonetheless, the company’s value came largely from its productive capacity: it owned hundreds of factories and employed around 1 percent of the total nonfarm work force.
                                                          Apple, by contrast, seems barely tethered to the material world..., it employs less than 0.05 percent of our workers. ... To a large extent, the price you pay for an iWhatever is disconnected from the cost of producing the gadget. Apple simply charges what the traffic will bear, and ... the traffic will bear a lot. ...
                                                          I’m not making a moral judgment here. You can argue that Apple earned its special position — although I’m not sure how many would make a similar claim for ... the financial industry... But here’s the puzzle: Since profits are high while borrowing costs are low, why aren’t we seeing a boom in business investment? ...
                                                          Well, there’s no puzzle here if rising profits reflect rents, not returns on investment. A monopolist can, after all, be highly profitable yet see no good reason to expand its productive capacity. ...
                                                          You might suspect that this can’t be good for the broader economy, and you’d be right. If household income and hence household spending is held down because labor gets an ever-smaller share of national income, while corporations, despite soaring profits, have little incentive to invest, you have a recipe for persistently depressed demand. I don’t think this is the only reason our recovery has been so weak — weak recoveries are normal after financial crises — but it’s probably a contributory factor.
                                                          Just to be clear, nothing I’ve said here makes the lessons of history irrelevant. In particular, the widening disconnect between profits and production does nothing to weaken the case for expansionary monetary and fiscal policy as long as the economy stays depressed. But the economy is changing, and in future columns I’ll try to say something about what that means for policy.

                                                            Posted by on Friday, June 21, 2013 at 12:24 AM in Economics, Income Distribution, Market Failure | Permalink  Comments (115) 

                                                            Links for 06-21-2013

                                                              Posted by on Friday, June 21, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (19) 

                                                              Thursday, June 20, 2013

                                                              'Corrupted Credit Ratings'

                                                              I was working on this post Tuesday morning when the phone rang and, to use Paul Krugman's phrase, life intervened. I had something to say about it, but I don't know what it was at this point. Anyway, may as well post it now (posts from me will continue to be sparse/absent for awhile -- immense thanks for the outpouring of support):

                                                              Corrupted Credit Ratings: S&P’s Lawsuit and the Evidence by Matthias Efing, Harald Hau, Vox EU: In its civil lawsuit against Sta)ndard & Poor's, the US Department of Justice accuses the credit-rating agency to have defrauded federally insured financial institutions... The US complaint alleges that Standard & Poor’s presented overly optimistic credit ratings as objective and independent when, in truth, Standard & Poor’s downplayed and disregarded the true extent of credit risk...

                                                              According to the plaintiff, Standard & Poor’s catered rating favors in order to maintain and grow its market share and the fee income generated from structured debt ratings. In support of these allegations, the complaint lists internal emails in which Standard & Poor’s analysts complain that analytical integrity is sacrificed in pursuit of rating favors for the issuer banks.

                                                              Standard & Poor’s files for dismissal of the case

                                                              Standard & Poor’s denies issuing inflated ratings and any possible conflict of interest... That some of Standard & Poor’s very own employees appealed to their colleagues and superiors to withdraw inflated ratings is dismissed as "internal squabbles" and interpreted as a "robust internal debate among Standard & Poor’s employees"...

                                                              Statistical evidence on rating bias in structured products

                                                              While the US Department of Justice did not give any statistical evidence in its deposition, our new research (Efing and Hau 2013) suggests that rating favors were indeed systematic and pervasive in the industry.

                                                              In a sample of more than 6,500 structured debt ratings produced by Standard & Poor’s, Moody's and Fitch, we show that ratings are biased in favor of issuer clients that provide the agencies with more rating business. This result points to a powerful conflict of interest, which goes beyond the occasional disagreement among employees.

                                                              The beneficiaries of this rating bias are generally the large financial institutions that issue most structured debt; they in turn provide the rating agencies with most of their fee income. Better ratings on different components (so-called tranches) of the debt-issue amount to a lower average yield at issuance – a cost reduction pocketed by the issuer bank. ...[presents evidence]...

                                                              The evidence also suggests that the two other rating agencies, Moody’s and Fitch were no less prone to rating favors towards their largest clients than was Standard & Poor’s. ...

                                                              Still more evidence on rating bias in bank ratings

                                                              Additional evidence for rating bias emerges for bank ratings. Hau, Langfield and Marques-Ibanes (2012) show in a paper forthcoming in Economic Policy that rating agencies gave their largest clients also more favorable overall bank credit ratings. ...

                                                              Hau, Langfield and Marqués-Ibañez (2012) also show that large banks profited most from rating favors. ... The rating process for banks may have contributed to substantial competitive distortions in the banking sector, thus fostering the emergence of the too-big-to-fail banks.

                                                              Ironies of the case

                                                              It is hard to read some of the legal arguments without being struck by a sense of irony.

                                                              In its defense, Standard & Poor’s argues (without admitting any rating bias) that it has never made a legally binding promise to produce objective and independent credit ratings. ... For an agency whose business model is based on its reputation as an impartial 'gatekeeper' of fixed income markets, this defense is most remarkable.

                                                              But the accusation has its own oddities: Standard & Poor’s argues that it is impossible to defraud financial institutions about "the likely performance of their own products". Standard & Poor’s points out the irony "that two of the supposed 'victims,' Citibank and Bank of America – investors allegedly misled into buying securities by Standard & Poor’s fraudulent ratings – were the same huge financial institutions that were creating and selling the very CDOs at issue"...

                                                              In many cases the victim-view on institutional investors may indeed be questionable: Large banks often issued complex securities and at the same time invested in them. It is hard to believe that the asset management division of a bank was ignorant of the dealings by the structured product division with the rating agencies. ... It is difficult to figure out where exactly the border between complicity and victimhood runs.

                                                              What could be done?

                                                              The lawsuit against Standard & Poor’s highlights the conflicts of interest inherent in the rating business, but can do little to resolve them. If new and complex regulation and supervision of rating agencies provides a remedy is unclear and remains to be seen. However, three alternative policy measures could make the existing conflicts much less pernicious:

                                                              • Similar to US bank regulation under the Dodd-Frank act, Basel III should abandon (or at least decrease) its reliance on rating agencies for the determination of bank capital requirements.
                                                              • As forcefully argued by Admati, DeMarzo, Hellwig and Pfleiderer (2011), much larger levels of bank equity as required under Basel III could reduce excessive risk-taking incentives and ensure that future failures in bank-asset allocation do not trigger another banking crisis.
                                                              • More bank transparency in the form of a full disclosure of all bank asset holdings at the security level would create more informative market prices for bank equity and debt, with positive feedback effects on the quality of bank governance and bank supervision.

                                                              Our reliance on bank ratings could thus be greatly reduced. ...

                                                                Posted by on Thursday, June 20, 2013 at 10:37 AM in Economics, Financial System, Market Failure, Regulation | Permalink  Comments (14) 

                                                                Fed Watch: The Chart to Watch?

                                                                Tim Duy:

                                                                The Chart to Watch?, by Tim Duy: Dylan Matthews at Wonkblog has a common chart illustrating the Fed's recent forecast errors:


                                                                The story is that the Fed has tended to overestimate the strength of the economy, and has consequently had to maintain easy policy longer than policymakers had anticipated. Assuming the Fed continues this pattern of errors, they may delay the now-anticipated exit from asset purchases. As monetary policymakers continue to emphasize, policy is data dependent.
                                                                But while the growth forecasts have tended to be overly optimistic, the same is not true for the unemployment forecast. Those forecasts have tended to move downward over time:


                                                                I am sure this difference has not been lost on the Fed, especially if they have a Phillips Curve view of inflation. I suspect that as unemployment creeps lower, they will downplay low growth in favor of emphasizing the importance of low unemployment. This is especially true now that Bernanke has defined a 7% trigger for ending asset purchases. In short, don't assume that a failure to meet the growth forecast will hold the Fed's hand. Watch the unemployment forecast; it may be more important at this point in the policy cycle.

                                                                  Posted by on Thursday, June 20, 2013 at 09:54 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (4) 

                                                                  Links for 06-20-2013

                                                                    Posted by on Thursday, June 20, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (94) 

                                                                    Wednesday, June 19, 2013

                                                                    Fed Watch: FOMC Statement: Second Reaction

                                                                    Tim Duy's second reaction to the FOMC meeting and press conference:

                                                                    FOMC Statement: Second Reaction

                                                                      Posted by on Wednesday, June 19, 2013 at 02:38 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (8) 

                                                                      Fed Watch: FOMC Statement: First Reaction

                                                                      Tim Duy:

                                                                      FOMC Statement: First Reaction, by Tim Duy: The June FOMC statement was released minutes ago, and it sent a clear signal that the door to scaling back asset purchases was now wide open. Of course, we still await the press conference, where Federal Reserve Chairman Ben Bernanke can place his own spin on the statement, but I suspect we will see him take the opportunity to set the stage for a policy change as early as September.

                                                                      Two key sentences stand out.

                                                                      Continue reading "Fed Watch: FOMC Statement: First Reaction" »

                                                                        Posted by on Wednesday, June 19, 2013 at 12:51 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (5) 

                                                                        Links for 06-19-2013

                                                                          Posted by on Wednesday, June 19, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (73) 

                                                                          Tuesday, June 18, 2013

                                                                          The Saddest News

                                                                          Cathleen Leué, technically my ex-wife but we had gotten back together several years ago, unexpectedly passed away last night. I will miss her terribly.

                                                                          Blogging may be light or non-existent for awhile.

                                                                          Update: UO mourns loss of IT expert Leué - AroundtheO.

                                                                            Posted by on Tuesday, June 18, 2013 at 03:52 PM Permalink  Comments (158) 

                                                                            Free, Unregulated Markets are Not Always the Answer: Seven Important Examples of How Markets Can Fail

                                                                            We are, as they say, live:

                                                                            7 Important Examples of How Markets Can Fail

                                                                            Not sure what happened, but the second paragraph of the introduction to the column is missing [Update: this is fixded]. It should be:

                                                                            7 Important Examples of How Markets Can Fail: Many people on the political right believe that free markets are the solution to most any problem. For example, Senator Pat Roberts (R-KS) introduced yet another attempt to repeal Obamacare with a call to “start over … with true, market based reforms.”
                                                                            However, free, unregulated markets are not always the answer. It’s true that competitive markets have desirable properties, but very special conditions must be present for competitive markets to emerge. When these conditions are not met, as is often the case in the real world, free markets can perform very poorly. In these cases – as illustrated in the following examples – government intervention that eliminates troublesome “market freedoms” can often be used to move these markets closer to the competitive ideal.
                                                                            1. Retirement Security ... [continue] ...

                                                                              Posted by on Tuesday, June 18, 2013 at 12:24 AM Permalink  Comments (131) 


                                                                              It was Monday afternoon

                                                                                Posted by on Tuesday, June 18, 2013 at 12:15 AM in Economics, University of Oregon | Permalink  Comments (9) 

                                                                                Links for 06-18-2013

                                                                                  Posted by on Tuesday, June 18, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (49) 

                                                                                  Monday, June 17, 2013

                                                                                  Fed Watch: FOMC Meeting Begins Tomorrow

                                                                                  Tim Duy:

                                                                                  FOMC Meeting Begins Tomorrow, by Tim Duy: This week's FOMC meeting is shaping up to be quite the event. Not for the actually policy result itself, which is widely expected to be unchanged, but for the subsequent press conference with Federal Reserve Chairman Ben Bernanke. The Fed's communication strategy has clearly unraveled in recent weeks, and Bernanke has an opportunity to regain control. But will he be able to do so, or will he leave even more confusion in his wake?

                                                                                  Start with the basics, the statement itself. The Fed is not going to change the pace of asset purchases this week. Recent Fedspeak has made clear that it remains too early to reduce monetary accommodation. The statement will probably be relatively unchanged. I anticipate that they take note of some moderately weaker data since the last FOMC meeting, as well as lower than anticipated inflation. Neither, however, is sufficient to drive asset purchases higher. It will be interesting to how much they emphasize the fiscal contraction. If the statement shifts to the side of "fiscal contraction appears to be having little impact on private activity," the implication would be that they are looking through the fiscal drag on headline GDP numbers. That obviously sets the stage for reducing asset purchases sooner than later.

                                                                                  Next come the closely watched forecasts. Near-term forecasts for inflation and perhaps GDP growth may be softer, but also watch the longer-term forecasts and especially any change in the expected path of unemployment. The latter, I think, is critical in setting an end to asset purchases - the Fed will want to be draw QE to a close prior to hitting the 6.5% threshold at which point they have said they will evaluate rate policy.

                                                                                  Finally comes the press conference. Here is where the real action should take place. Market participants have become increasingly concerned about ending asset purchases. I believe that market participants are having trouble understanding the implications, or lack thereof, of altering the pace of quantitative easing on interest rate policy. Bernanke will attempt to clear the way for ending quantitative easing while attempting to divorce that decision from any subsequent decision on rate hikes.

                                                                                  This, of course, will be easier said than done. I think a critical problem is that the Fed does not want to be pre-committed to some policy path, but at the same time does not want to surprise markets. They want to avoid a repeat of 1994, with the sharp spike in yields viewed as a communications failure. They believed they would resolve this divide by shifting the focus to the data. They were wrong.

                                                                                  Ylan Mui at the Washington Post describes the nature of the problem:

                                                                                  Investors increasingly have focused on predicting the moment the Fed will start to pull back on its massive stimulus program...

                                                                                  ...It’s the type of parlor game the Fed had hoped to avoid. Instead, it has tried to convince the markets that the date is less important than the data.

                                                                                  Fed officials deliberately chose not to attach a time frame to their easy-money policies when developing their forward guidance for the public last year.

                                                                                  Stop right here. I think it is important to note that Fed policymakers are the ones who started the ball rolling on the importance of the date over the data. Specifically, at the beginning of April San Franscisco Federal Reserve President John Williams defined a time line for ending QE given the current path of data. At that point the conversation shifted from data to date. Other policymakers followed suit.

                                                                                  Does that mean that Williams made an error? Not necessarily. I think it is impossible to communicate the path of policy without making market participants aware of the associated timeline. Once you describe your view of the data and your forecast, by default you will define the expected time for the policy change. In effect, the Fed can't have it both ways. They can't jointly pretend the date doesn't matter while at the same time clearly communicating the path of policy. If they don't communicate the path/timing, then the eventual policy move will trigger an overreaction. If they do communicate the path/timing, but don't explain how that path fits in the context of the data, then they also risk an overreaction.

                                                                                  The latter is the position they now find themselves in. Williams let the cat out of the bag, that the Fed had a timeline in mind. But it is challenging to see how the data fits into the time line. Back to Mui:

                                                                                  The goal was to help investors come to better conclusions on their own by revealing the public data that Fed officials use as guideposts. In theory, that means interest rates would hew more closely to incoming data than to Fed pronouncements.

                                                                                  But, as it turns out, there are many ways to parse the numbers.

                                                                                  “They kind of threw out these conditions,” said Michael Feroli, chief U.S. economist at JPMorgan. “They’re telling us something but not telling us something.”

                                                                                  Honestly, it is difficult to make the case for ending asset purchases on the data alone. It is neither clear that the labor market is stronger and sustainable nor that asset purchases should be cut in the face of falling inflation. In fact, I think you can argue that the Fed is moving the goalposts to some less defined objective. As noted above, I think the path of the unemployment rate plays a role. But so too does financial stability concerns. And also general discomfort on the part of policymakers about the size of the balance sheet. Indeed, the December conversion from Operation Twist to asset purchases may have been simply insurance against a fiscal disaster that did not materialize. Ultimately, the shift to tapering talk was too abrupt given the data, and that raises the possibility that some undisclosed factor is at work.

                                                                                  Now, if we don't understand what is driving the decision to scale back asset purchases, then it is likely we also don't understand how the data will impact subsequent interest rate decisions. Again, back to Mui:

                                                                                  Part of the problem has been muddy economic data that do not provide a clear signal of where the recovery is headed. The Fed also has left itself plenty of wiggle room to interpret the data. It did not define what “substantial improvement” would be required to dial back its $85 billion-a-month in bond purchases, and it has suggested that it could leave interest rates untouched even after its unemployment or inflation thresholds are met.

                                                                                  If the Fed's plans for ending quantitative easing are opaque relative to the data, then what is are we to expect when the unemployment threshold approaches. An equally opaque policy response? Is the Fed going to change the goalposts again? When does it shift from unemployment and inflation to concerns about financial stability? And how do they propose to pretend that you can commit to some data dependent path without implying a related time line?

                                                                                  Bottom Line: This FOMC meeting is about the Fed regaining - or further losing - control over its communication strategy. Bernanke will attempt to detail how exactly the data flow is supportive of scaling back asset purchases in the next few months (I believe the Fed prefers September) while at the same time disassociating asset purchases from interest rate policy. I think it is important that market participants believe that the shift to tapering talk was entirely data dependent and not influenced by some other factors. Otherwise, they will doubt the supposed data dependent thresholds for rate policy. And the Fed is going to have to come to terms with the reality that the instant they start to anticipate a change in policy, they start a clock ticking. Making the distinction between date and data is not as easy as it sounds.

                                                                                    Posted by on Monday, June 17, 2013 at 01:16 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (7) 

                                                                                    Are We There Yet?

                                                                                    Employment-Population Ratio

                                                                                      Posted by on Monday, June 17, 2013 at 11:09 AM in Economics, Unemployment | Permalink  Comments (29) 

                                                                                      Paul Krugman: Fight the Future

                                                                                      Why are we so worried about highly uncertain budget projections extending decades into the future when we have very real problems such as high levels of unemployment that need our immediate attention?

                                                                                      Fight the Future, by Paul Krugman, Commentary, NY Times: Last week the International Monetary Fund, whose normal role is that of stern disciplinarian to spendthrift governments,... argued that the sequester and other forms of fiscal contraction will cut this year’s U.S. growth rate by almost half, undermining what might otherwise have been a fairly vigorous recovery. And these spending cuts are both unwise and unnecessary.
                                                                                      Unfortunately, the fund apparently couldn’t bring itself to break completely with the austerity talk that is regarded as a badge of seriousness in the policy world. Even while urging us to run bigger deficits for the time being, Christine Lagarde, the fund’s head, called on us to “hurry up with putting in place a medium-term road map to restore long-run fiscal sustainability.”
                                                                                      So here’s my question: Why, exactly, do we need to hurry up? Is it urgent that we agree now on how we’ll deal with fiscal issues of the 2020s, the 2030s and beyond?
                                                                                      No, it isn’t. And in practice, focusing on “long-run fiscal sustainability” — which usually ends up being mainly about “entitlement reform,” a k a cuts to Social Security and other programs — isn’t a way of being responsible. On the contrary, it’s an excuse, a way to avoid dealing with the severe economic problems we face right now.
                                                                                      What’s the problem with focusing on the long run? Part of the answer ... is that the distant future is highly uncertain (surprise!)... In particular, projections of huge future deficits are to a large extent based on the assumption that health care costs will continue to rise substantially faster than national income — yet the growth in health costs has slowed dramatically in the last few years, and the long-run picture is already looking much less dire...
                                                                                      When will we be ready for a long-run fiscal deal? My answer is, once voters have spoken decisively in favor of one or the other of the rival visions driving our current political polarization. Maybe President Hillary Clinton, fresh off her upset victory in the 2018 midterms, will be able to broker a long-run budget compromise with chastened Republicans; or maybe demoralized Democrats will sign on to President Paul Ryan’s plan to privatize Medicare. Either way, the time for big decisions about the long run is not yet.
                                                                                      And because that time is not yet, influential people need to stop using the future as an excuse for inaction. The clear and present danger is mass unemployment, and we should deal with it, now.

                                                                                        Posted by on Monday, June 17, 2013 at 12:24 AM in Budget Deficit, Economics, Politics, Unemployment | Permalink  Comments (63) 

                                                                                        Links for 06-17-2013

                                                                                          Posted by on Monday, June 17, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (40) 

                                                                                          Sunday, June 16, 2013

                                                                                          'Don’t Blame the Work Force'

                                                                                          From today's links:

                                                                                          Don’t Blame the Work Force, Editorial Board, NY Times: There is a durable belief that much of today’s unemployment is rooted in a skills gap, in which good jobs go unfilled for lack of qualified applicants. This is mostly a corporate fiction, based in part on self-interest and a misreading of government data.
                                                                                          A Labor Department report last week showed 3.8 million job openings in the United States in April — proof, to some, that there would be fewer unemployed if more people had a better education and better skills. But both academic research and a closer look at the numbers in the department’s Job Openings and Labor Turnover Survey show that unemployment has little to do with the quality of the applicant pool. ... [presents numbers and research] ...
                                                                                          If a business really needed workers, it would pay up. That is not happening, which calls into question the existence of a skills gap as well as the urgency on the part of employers to fill their openings. Research from the National Bureau of Economic Research found that “recruiting intensity” — that is, business efforts to fill job openings — has been low in this recovery. Employers may be posting openings, but they are not trying all that hard to fill them, say, by increasing job ads or offering better pay packages.
                                                                                          Corporate executives have valuable perspectives on the economy, but they also have an interest in promoting the notion of a skills gap. They want schools and, by extension, the government to take on more of the costs of training workers that used to be covered by companies as part of on-the-job employee development. They also want more immigration, both low and high skilled, because immigrants may be willing to work for less than their American counterparts.
                                                                                          There are many reasons to improve education, to welcome immigrants and to advance other policies aimed at transforming the work force and society. But a skills gap is not among them. Meeting today’s job challenges requires action to improve both the economy and pay, including government measures to create jobs, strengthen health and retirement systems, and raise the minimum wage. Fretting about a skills gap that does not exist will not help.

                                                                                          On the "If a business really needed workers, it would pay up" and "recruiting intensity" statements above, here's a rerun of a post of mine on this topic (this is from 2011):

                                                                                          ... With all the talk about whether our unemployment problem is cyclical or structural (I believe it's mostly cyclical), many people are looking at measures of mismatches to assess how much of the problem is structural. But care needs to be taken in the interpretation of mismatch numbers. Here's why.
                                                                                          Suppose that you run a business in Town A and you need someone to run a complicated piece of equipment. Unfortunately, the size of your town is relatively moderate, and there are no qualified job applicants available. You have advertised the job for weeks, but no takers. This sounds like a classic case of structural unemployment -- there is a need for workers with a different skill set -- but it may not be a structural problem.
                                                                                          Suppose also that the economy is in a recession, and business has not been good. Because of that, you can't offer a very high wage. It turns out that in the very next town, Town B, there is a qualified worker who was laid off due to a business failure caused by the recession, but at the wage you are offering the worker is not willing to move. The worker has a job and is surviving, though the pay is much less than before and the worker is underemployed -- the worker is mismatched -- but the family is getting by.
                                                                                          However, if things were better -- if the economy was humming away at full employment -- the employer in Town A could offer a higher wage and induce the worker in Town B to move. If this is the case, then this unemployment is cyclical, not structural. There is a mismatch, but the mismatch is driven by lack of demand.
                                                                                          The point is that when we talk about structural unemployment, we assume aggregate demand is not the problem. Thus, structural unemployment must be measured under an assumption that demand is sufficient to return us to full employment. ... If an increase in demand will fix the problem, as in the example above, then it's not a structural problem.
                                                                                          The bottom line is that to measure structural unemployment in a recession, it's not enough to simply survey the labor market and count the mismatches. You have to know if those mismatches would persist at a level of demand consistent with full employment. To the extent that the mismatch problem is due to lack of demand, and wages and prices that are too low to induce resource movements to their best use, the problem is cyclical, not structural.

                                                                                            Posted by on Sunday, June 16, 2013 at 09:42 AM in Economics, Unemployment | Permalink  Comments (46) 

                                                                                            Wall Street is Winning the War against Regulation

                                                                                            Wall Street is successfully resisting attempts to regulate the financial industry:

                                                                                            Wall Street is winning the long war against post-crash regulation, by Heidi Moore, guardian.co.uk: ...There are no such things as borders in the world of finance; it's an integrated whole. ... That's why it's so baffling that the House of Representatives came down, this week, on the side of ignoring abuses of US-made derivatives – known as swaps – as soon as they're wired overseas. These swaps were at the heart of the London Whale trading debacle...
                                                                                            The House voted overwhelmingly to let the measure – labeled the London Whale Loophole Act by critics – pass. It's one of several measures that the House has taken to weaken oversight of derivatives; the other two will come up for debate soon.
                                                                                            It will surprise no cynic that there is a financial connection between the members of Congress who approve these measures and the industry they are supposed to regulate. According to MapLight:
                                                                                            "On average, House agriculture committee members voting for HR 992 [one of the derivatives bills] have received 7.8 times as much money from the top four banks as House agriculture committee members voting against the bill."
                                                                                            It's no surprise, of course – given the well-known influence of Wall Street in writing and influencing the bills that regulate Wall Street. Citigroup lobbyists infamously drafted 70 lines of an 85-line amendment that protected a large acreage of derivatives from regulation.
                                                                                            There is more to add. ... [adds more] ...
                                                                                            All of this is part of the process of killing off the one flailing, pathetic attempt at financial reform: the Dodd-Frank Act. Dodd-Frank, bloated and vague from the beginning, was never a threat to Wall Street. Big banks thought they could wait out the outrage, then start undermining the intent of the law.
                                                                                            They were right, this time. But when they're wrong – and when those derivatives cause another crisis – it'll be Americans who pay the price.

                                                                                              Posted by on Sunday, June 16, 2013 at 09:23 AM in Economics, Financial System, Regulation | Permalink  Comments (16) 

                                                                                              Links for 06-16-2013

                                                                                                Posted by on Sunday, June 16, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (38) 

                                                                                                Saturday, June 15, 2013

                                                                                                'What Sweden Can Tell Us About Obamacare'

                                                                                                Robert Frank:

                                                                                                What Sweden Can Tell Us About Obamacare, by Robert Frank, Commentary, NY Times: Last month, for the 37th time, the House of Representatives voted to repeal Obamacare, with many Republicans saying that its call for greater government involvement in the health care system spells doom. Yet most other industrial countries have health care systems with far more government involvement than we are ever likely to see under Obamacare. What does their experience tell us about Republican fears?
                                                                                                While in Sweden this month as a visiting scholar, I’ve asked several Swedish health economists to share their thoughts about that question. They have spent their lives under a system in which most health care providers work directly for the government. Like economists in most other countries, they tend to be skeptical of large bureaucracies. ...
                                                                                                Yet none of them voiced ... complaints about recalcitrant bureaucrats... Little wonder. The Swedish system performs superbly, and my Swedish colleagues cited evidence of that fact with obvious pride. ...
                                                                                                Congressional critics must abandon their futile efforts to repeal Obamacare and focus instead on improving it. Their core premise — that greater government involvement in health care provision spells disaster — lacks support in the wealth of evidence from around the world that bears on it.
                                                                                                The truth appears closer to the reverse: Because of pervasive market failures in private health care markets, this may be the sector that benefits most from collective action.

                                                                                                  Posted by on Saturday, June 15, 2013 at 11:09 AM in Economics, Health Care, Market Failure | Permalink  Comments (149) 

                                                                                                  IMF Urges Repeal of 'Ill-Designed' Spending Cuts

                                                                                                  In case you missed this, the IMF estimates that economic growth would be nearly double what it is now without the "excessively rapid and ill-designed" government spending cuts:

                                                                                                  IMF Urges Washington to Repeal ‘Ill-Designed’ Spending Cuts, Reuters: The International Monetary Fund urged the United States on Friday to repeal sweeping government spending cuts and recommended that the Federal Reserve continue a bond-buying program through at least the end of the year.
                                                                                                  In its annual check of the health of the U.S. economy, the IMF forecast economic growth would be a sluggish 1.9 percent this year. The IMF estimates growth would be as much as 1.75 percentage points higher if not for a rush to cut the government's budget deficit. ...
                                                                                                  "The deficit reduction in 2013 has been excessively rapid and ill-designed," the IMF said. "These cuts should be replaced with a back-loaded mix of entitlement savings and new revenues."
                                                                                                  The IMF warned cuts to education, science and infrastructure spending could reduce potential growth. ...
                                                                                                  The Fund recommended that the U.S. Federal Reserve keep up its massive asset purchases at least through the end of the year to support the U.S. recovery, but should also prepare for a pull-back in the future. ...

                                                                                                  The recovery of output and employment didn't have to be so slow. I'm not saying that reversing these policies (or replacing them with more aggressive fiscal policy measures) would have brought miracles, it was going to be a difficult recovery no matter what polices we pursued. But we certainly could have done better than we did, particularly on the fiscal policy front.

                                                                                                    Posted by on Saturday, June 15, 2013 at 08:44 AM in Economics, Fiscal Policy | Permalink  Comments (24) 

                                                                                                    Links for 06-15-2013

                                                                                                      Posted by on Saturday, June 15, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (62)